Bloomberg News

Rand Gains to Euro on Speculation Yield Difference to Persist

June 09, 2011

June 9 (Bloomberg) -- The rand gained against the euro for a third day, reversing its earlier decline, on speculation the European Central Bank won’t raise rates as quickly as previously expected, maintaining the rand’s yield advantage.

The rand advanced as much as 0.4 percent to 9.7726 per euro, and traded 0.2 percent stronger at 9.7948 at 4:28 p.m. in Johannesburg. It declined 0.4 percent to 6.7422 per dollar after Moody’s Investors Service said South Africa’s fiscal position has deteriorated.

The euro dropped more than a cent against the dollar, and declined against 12 of its 16 most-traded counterparts, after the ECB left its benchmark rate at 1.25 percent. ECB President Jean-Claude Trichet said the central bank hadn’t raised its 2012 inflation forecast from 1.7 percent, prompting traders to scale back bets for the pace on interest-rate increases. South Africa’s benchmark rate is 5.5 percent.

“Interest rate hikes had been priced in for 2012, but the chances are probably starting to look a bit scant now,” Brigid Taylor, head of institutional sales at Nedbank Group Ltd. in Johannesburg, said by phone. “There has been a lot of unwinding of long-euro positions.”

Euribor futures rose, pushing the implied yield on the March 2012 contract down seven basis points to 1.96 percent, as traders reduced bets policy makers will boost rates. South African forward rate agreements effective in December are at 5.995 percent, indicating traders are betting on a 0.5 percentage point rate increase before the end of the year.

South Africa’s central bank will probably raise interest rates later this year, Kristin Lindow, sovereign credit analyst at Moody’s, said in Johannesburg today.

The rand extended its decline against the dollar after manufacturing growth eased to the slowest pace in four months in April. Growth in factory output, which accounts for 15 percent of the economy, slipped to 0.4 percent in April from a revised 4.9 percent the month before, Pretoria-based Statistics South Africa said on its website today. The median estimate of 16 economists surveyed by Bloomberg was 5 percent.

“Disappointing manufacturing data” could be a “catalyst for rand weakness,” Michael Keenan, a Johannesburg-based analyst at Standard Bank Group Ltd., said by phone before the release of the data.

Bonds weakened for a second day. The 13.5 percent notes due 2015 dropped 8 cents to 121.76 rand, driving the yield up 2 basis points, or 0.02 percentage point, to 7.42 percent. The 6.75 percent securities due 2021 slid 6 cents to 90.19 rand, boosting the yield 1 basis point to 8.23 percent.

--Editor: Gavin Serkin

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net.


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